I wrote this post just before the most recent quarter was released. Not much changed from a valuation standpoint than what is written here.

I’ve recently taken a position in Vigil Health Solutions. Of course, I didn’t discover this idea on my own, I stole it from others. Quality Small Caps wrote is up here and this company has been profiled on the MicroCapClub (you should join if you haven’t already). The Quality Small Caps write-up is quite detailed, I suggest you read it.

Background

Vigil develops and markets hardware and software solutions that guide care of and monitor residents in senior living communities. They focus on non-invasive monitoring for residents with dementia.

There are obvious demographic tailwinds with this one. The addressable market is growing quite fast and Vigil provides a high value service with a monthly recurring cost.

They are quality focused and not the cheapest product on the market. They differentiate themselves by focusing on integrating the monitoring system (door, phone, etc) with analytics that will trigger alarms to the relevant parties. For example, if a resident leaves his/her room at 2am when he/she normally doesn’t then the staff are notified and can intervene and ensure the resident is returned safely to their room. They also offer cloud based analytics.

Their service scales up from very basic to quite comprehensive, allowing them to compete on most (if not all) projects.

The sales cycle is long and much of the bookings are part of new facility construction which leads to quite lumpy revenue.

Management

There’s limited information on the management team in the filings, so here’s all I’ve been able to dig up:

Troy Griffiths – CEO

has been CEO since 2005 and with the company since 1998

started out as COO of Vigil’s predecessor

compensation last year was $128k in salary with $250k in total comp

own 820,000 shares or over 3 times his salary

Nicola Chalmers – CFO

has been with Vigil since 1998 as CFO

compensation last year was $82k salary and $120k total comp

owns 167,000 shares or roughly her annual salary

Steven Smith – VP R&D

has been with Vigil since 2006

$117k salary and $156k total comp

owns 1.1 mil shares or more than 3x his total comp last year

The team seems to be experienced in the business, is incentivized with common share ownership and gets compensated reasonably.

The variable part of their compensation is based on both financial and business performance. This is something you don’t always see in the Canadian microcap space and is really nice to see.

Board

For a company this size Vigil has a small but quite respectable board. Non-executive directors are compensated by mix of fees and options. Total compensation ranges from $25-41k per year.

Troy Griffiths – CEO

Greg Peet – Chairman

was CEO and Chairman of ALI Technologies which was acquired by McKesson Corp in 2002

owns 4.9mil shares

principal at GrowthPoint Capital

Ian Power

several senior positions

director of Pender Growth Fund

owns 15,000 shares

Lindsay Ryerson

VP and GM of Telematics at Vecima

owns 10,000 shares

Financials

See below for a quick look at the income statement. TTM rev at 6.3 mil, Ebit of 0.5 mil and ebitda of 0.5 mil.

The top line and bottom line have been growing. You can see that they have a strong backlog and bookings. Backlog is almost 4 mil.

They also have a large portion of their revenue based on recurring service and maintenance work. This portion should fetch a high multiple.

Valuation

At $0.50, the market cap is around 9.3 mil and the EV is 6.7 mil. See below for relevant valuations.

Not particularly cheap from a profitability standpoint. But I believe that this is a growing business and should see some operating leverage in the future.

Risks

Here are the risks that I can identify.

Liquidity for your personal portfolio. I am blessed to have a small amount of money. If you are responsible for a large amount of capital, it may be difficult to build or unwind a position.

Product/service risk for Vigil. There is a chance that despite a large and growing market, customers may seek solutions that Vigil does not compete in. Namely, the low priced and more commoditized portion of the market. Of course, Vigil may be able to adapt. Vigil’s average deal size is around $70k and the facility costs are usually over $10 mil. Go/No-Go decisions are not likely based on the Vigil solutions alone and it’s not a large portion of the cost of the facility.

Execution (most notably for a microcap). Many microcaps have the executive teams wearing multiple hats. They regularly have to bounce between long term strategic and day-to-day tactical decisions. That leads to increased importance on specific individuals.

Price volatility. Given the long sales cycle, dependent on facility completions and modest valuation, one can paint a scenario where the share price of Vigil could take a hit.

There may be concern of reimbursement (medicare/medicaid) risk. I don’t believe that this is a significant risk for Vigil. Given that they participate in the facility build out, they are not exposed to the typical reimbursement risk (at least, not to my knowledge).

Other Things of Interest

Wayen Enright owns 2.7 mil share or about 16% of the outstanding. I can’t find much about him online.

I’ll be attending the AGM next week

Overall, I think Vigil is a decent bet at these prices. They have a secular tailwind, strong and incentivezed management team, a board that compliments the business and a modest valuation.

I picked up a small position today at $ 0.49. I like that this is medical technology and that its goal is to reduce medical costs. I also like that Ian Power is involved. I have a lot of respect for the PenderFund folks.Another company you might want to check out is Medicure. They have a lot of cash on the balance sheet and some growth opportunities.

I’m still processing the results. I’m trying to get a handle on how much this company controls it’s destiny. Given their reliance on new construction, I am struggling to add even though the valuation seems reasonable and the product does have a strong value proposition.